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Finance and Growth: Theory and Evidence

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  • Ross Levine

Abstract

This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.

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  • Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10766
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    JEL classification:

    • G0 - Financial Economics - - General
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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